Thorn Group Ltd reports 35% profit drop – but maintains 8% dividend

Today’s report will be an interesting read for shareholders of Thorn Group Ltd (ASX: TGA). Although the company’s underlying performance was strong, there was the $10 million dollar ‘elephant in the room’ of business impairments, as well as a couple of warning signs with rising debt.

Here were the highlights:
Revenue rose 3.5% to $304 million
Net Profit After Tax (NPAT) fell 34% to $20.1 million
Underlying NPAT fell 0.7% to $30.3 million
Dividends per share of 11.5 cents per share (11.75 cents last year)
Receivables jumped 32% to $380 million
Debt rose 37% to $197.9 million, taking gearing from 38.5%…

To keep reading, enter your email address or login below.

Enter your email below for FREE access to this article and all the content on the site. Also receive Take Stock, The Motley Fool's unique daily email on what's really happening with the share market. You may unsubscribe any time.

Today’s report will be an interesting read for shareholders of Thorn Group Ltd(ASX: TGA). Although the company’s underlying performance was strong, there was the $10 million dollar ‘elephant in the room’ of business impairments, as well as a couple of warning signs with rising debt.

Here were the highlights:

Revenue rose 3.5% to $304 million

Net Profit After Tax (NPAT) fell 34% to $20.1 million

Underlying NPAT fell 0.7% to $30.3 million

Dividends per share of 11.5 cents per share (11.75 cents last year)

Receivables jumped 32% to $380 million

Debt rose 37% to $197.9 million, taking gearing from 38.5% to 53.2%

Cash at bank of $14 million

So What?

There’s two distinct parts to this report. One part involves looking over the past year’s results and interpreting the results. In that respect, management’s decision to drop the consumer loans and debt collection businesses looks like a wise move. Personnel and resources can be redirected to the consumer leasing and business finance segments, which “generate attractive and recurring levels of return on capital that warrant further investment“.

Lease impairments rose in line with growth in receivables and, while there was an increase in delinquencies, this looks statistically insignificant for consumer leasing, while business finance might be worth keeping an eye on.

All in all it wasn’t a bad performance from Thorn, but the second part of the report involves analysing the company’s outlook, which is tricky. Although management has indicated that consumer leasing and business finances are growth areas that will be in focus going forwards, there is also the potential for a short-term hit to earnings from regulatory scrutiny and increased investment in risk management.

Regulatory Concerns

One of the reasons for Thorn’s apparent cheap-ness is likely the ongoing Australian Securities and Investment Commission’s audit into the company’s practices between 2012 and 2015. Thorn reports that ASIC found several possible breaches of its responsible lending obligations. Thorn previously covered the issue under ‘Contingent Liability’ in its half-year report, reported that it was remediating affected customers, and suggested that the amounts were not material. However, the annual report now states that penalties may be imposed by ASIC, although the outcome is ‘not certain‘. This is an area for investors to keep an eye on, and Thorn has promised to update the market ‘at the appropriate time.‘

Regulatory risk remains around potential changes to consumer leasing practices as well, although as yet the outcome is uncertain and difficult to quantify. A more crucial area of focus for Thorn will be its funding situation, with the company’s gearing (net debt divided by equity) soaring, partly thanks to its plunging share price.

A bright spot was Thorn’s customer satisfaction ratings, with the company reporting that independent market research shows that 97% of Radio Rentals customers felt treated with dignity and respect, 92% consider the business affordable, and 70% said that Radio Rentals was the only way for them to access affordable everyday goods.

There can be a number of flaws in market research but all three of these metrics are excellent, and should provide some indication of the quality and ‘essential’ nature of Thorn’s business. This could provide some resilience during an economic downturn.

Although I’ve focussed a lot on the negatives of the report, it was overall an acceptable performance from Thorn, which maintained its consumer leasing revenues while doubling the much smaller Business Finance segment. Investors will need to be patient, but the company could be an opportunity today – not least for its 8% dividend.

Looking for a better bet than Thorn Group?

When renowned dividend investing pros like Andrew Page issue buy alerts, it pays to listen. Because investors who followed Andrew's recommendation of Australian Pharmaceuticals in early 2015 could've doubled their money in just over a year, turning $15,000 into over $30,000 by the time he recommended they sell and lock in their profits.

Motley Fool contributor Sean O'Neill owns shares of Thorn Group Limited. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss a very important event! Chief Investment Advisor Scott Phillips and his team at Motley Fool Share Advisor are about to reveal their latest official stock recommendation. The premium “buy alert” will be unveiled to members and you can be among the first to act on the tip.

Don’t let this opportunity pass you by – this is your chance to get in early!

Simply enter your email now to find out how you can get instant access.

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our Financial Services Guide (FSG) for more information.

CLAIM YOUR FREE SUBSCRIPTION NOW

What's REALLY going on in the share market...and what do we think is the BEST and SAFEST way to make some money right now? Discover our experts' take on the ASX with your FREE subscription to The Motley Fool Australia's weekly email Take Stock...

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our Financial Services Guide (FSG) for more information.